6.1 – Building the case

Previously we understood that, an option seller and the buyer are like two sides of the same coin. They have a diametrically opposite view on markets. Going by this, if the Put option buyer is bearish about the market, then clearly the put option seller must have a bullish view on the markets. Recollect we looked at the Bank Nifty’s chart in the previous chapter; we will review the same chart again, but from the perspective of a put option seller.

The typical thought process for the Put Option Seller would be something like this –

Bank Nifty is trading at 18417

2 days ago Bank Nifty tested its resistance level at 18550 (resistance level is highlighted by a green horizontal line)

18550 is considered as resistance as there is a price action zone at this level which is well spaced in time (for people who are not familiar with the concept of resistance I would suggest you read about it here)

I have highlighted the price action zone in a blue rectangular boxes

Bank Nifty has attempted to crack the resistance level for the last 3 consecutive times

All it needs is 1 good push (maybe a large sized bank announcing decent results – HDFC, ICICI, and SBI are expected to declare results soon)

A positive cue plus a move above the resistance will set Bank Nifty on the upward trajectory

Hence writing the Put Option and collecting the premiums may sound like a good idea

You may have a question at this stage – If the outlook is bullish, why write (sell) a put option and why not just buy a call option?

Well, the decision to either buy a call option or sell a put option really depends on how attractive the premiums are. At the time of taking the decision, if the call option has a low premium then buying a call option makes sense, likewise if the put option is trading at a very high premium then selling the put option (and therefore collecting the premium) makes sense. Of course to figure out what exactly to do (buying a call option or selling a put option) depends on the attractiveness of the premium, and to judge how attractive the premium is you need some background knowledge on ‘option pricing’. Of course, going forward in this module we will understand option pricing.

So, with these thoughts assume the trader decides to write (sell) the 18400 Put option and collect Rs.315 as the premium. As usual let us observe the P&L behavior for a Put Option seller and make a few generalizations.

Do Note – when you write options (regardless of Calls or Puts) margins are blocked in your account. We have discussed this perspective here,request you to go through the same.

6.2 – P&L behavior for the put option seller

Please do remember the calculation of the intrinsic value of the option remains the same for both writing a put option as well as buying a put option. However the P&L calculation changes, which we will discuss shortly. We will assume various possible scenarios on the expiry date and figure out how the P&L behaves.

Serial No.

Possible values of spot

Premium Received

Intrinsic Value (IV)

P&L (Premium – IV)

01

16195

+ 315

18400 – 16195 = 2205

315 – 2205 = – 1890

02

16510

+ 315

18400 – 16510 = 1890

315 – 1890 = – 1575

03

16825

+ 315

18400 – 16825 = 1575

315 – 1575 = – 1260

04

17140

+ 315

18400 – 17140 = 1260

315 – 1260 = – 945

05

17455

+ 315

18400 – 17455 = 945

315 – 945 = – 630

06

17770

+ 315

18400 – 17770 = 630

315 – 630 = – 315

07

18085

+ 315

18400 – 18085 = 315

315 – 315 = 0

08

18400

+ 315

18400 – 18400 = 0

315 – 0 = + 315

09

18715

+ 315

18400 – 18715 = 0

315 – 0 = + 315

10

19030

+ 315

18400 – 19030 = 0

315 – 0 = + 315

11

19345

+ 315

18400 – 19345 = 0

315 – 0 = + 315

12

19660

+ 315

18400 – 19660 = 0

315 – 0 = + 315

I would assume by now you will be in a position to easily generalize the P&L behavior upon expiry, especially considering the fact that we have done the same for the last 3 chapters. The generalizations are as below (make sure you set your eyes on row 8 as it’s the strike price for this trade) –

The objective behind selling a put option is to collect the premiums and benefit from the bullish outlook on market. Therefore as we can see, the profit stays flat at Rs.315 (premium collected) as long as the spot price stays above the strike price.

Generalization 1 – Sellers of the Put Options are profitable as long as long as the spot price remains at or higher than the strike price. In other words sell a put option only when you are bullish about the underlying or when you believe that the underlying will no longer continue to fall.

As the spot price goes below the strike price (18400) the position starts to make a loss. Clearly there is no cap on how much loss the seller can experience here and it can be theoretically be unlimited

Generalization 2 – A put option seller can potentially experience an unlimited loss as and when the spot price goes lower than the strike price.

Here is a general formula using which you can calculate the P&L from writing a Put Option position. Do bear in mind this formula is applicable on positions held till expiry.

P&L = Premium Recieved – [Max (0, Strike Price – Spot Price)]

Let us pick 2 random values and evaluate if the formula works –

16510

19660

@16510 (spot below strike, position has to be loss making)

= 315 – Max (0, 18400 -16510)

= 315 – 1890

= – 1575

@19660 (spot above strike, position has to be profitable, restricted to premium paid)

= 315 – Max (0, 18400 – 19660)

= 315 – Max (0, -1260)

= 315

Clearly both the results match the expected outcome.

Further, the breakdown point for a Put Option seller can be defined as a point where the Put Option seller starts making a loss after giving away all the premium he has collected –

Breakdown point = Strike Price – Premium Received

For the Bank Nifty, the breakdown point would be

= 18400 – 315

= 18085

So as per this definition of the breakdown point, at 18085 the put option seller should neither make any money nor lose any money. Do note this also means at this stage, he would lose the entire Premium he has collected. To validate this, let us apply the P&L formula and calculate the P&L at the breakdown point –

= 315 – Max (0, 18400 – 18085)

= 315 – Max (0, 315)

= 315 – 315

=0

The result obtained in clearly in line with the expectation of the breakdown point.

6.3 – Put option seller’s Payoff

If we connect the P&L points (as seen in the table earlier) and develop a line chart, we should be able to observe the generalizations we have made on the Put option seller’s P&L. Please find below the same –

Here are a few things that you should appreciate from the chart above, remember 18400 is the strike price –

The Put option seller experiences a loss only when the spot price goes below the strike price (18400 and lower)

The loss is theoretically unlimited (therefore the risk)

The Put Option seller will experience a profit (to the extent of premium received) as and when the spot price trades above the strike price

The gains are restricted to the extent of premium received

At the breakdown point (18085) the put option seller neither makes money nor losses money. However at this stage he gives up the entire premium he has received.

You can observe that at the breakdown point, the P&L graph just starts to buckle down – from a positive territory to the neutral (no profit no loss) situation. It is only below this point the put option seller starts to lose money.

And with these points, hopefully you should have got the essence of Put Option selling. Over the last few chapters we have looked at both the call option and the put option from both the buyer and sellers perspective. In the next chapter we will quickly summarize the same and shift gear towards other essential concepts of Options.

Key takeaways from this chapter

You sell a Put option when you are bullish on a stock or when you believe the stock price will no longer go down

When you are bullish on the underlying you can either buy the call option or sell a put option. The decision depends on how attractive the premium is

Option Premium pricing along with Option Greeks gives a sense of how attractive the premiums are

The put option buyer and the seller have a symmetrically opposite P&L behavior

When you sell a put option you receive premium

Selling a put option requires you to deposit margin

When you sell a put option your profit is limited to the extent of the premium you receive and your loss can potentially be unlimited

173 comments

thanks kartik for your reply on my previous question and also for the next chapter!
my question is
Q-since options are traded on premiums. is margin is available on premiums. i want yo ask is suppose i have 1,00,000 rs. and nifty 8280 call option is trading at a premium of 100. then by this i can buy 1000 shares of nifty. but can i buy more than this. if yes it can be NRML, MIS OR BO&CO

The higher the IV of the option, the lower goes the premium cost. In fact, after a point, the premium has a negative value. What’s the catch?

MayPut9000 seems to have the highest padding…that is, if my view is bearish, I can have a tolerance of 96 points for the Nifty to go in the opposite direction, before I start to make a loss. Am I right? Are there any pitfalls in choosing this method?

Well, if you notice as you traverse away from the strike price which are away from the current market price the difference crops up. This is mainly attributable to liquidity and moneyness of options. In fact in chapter 8 (will take it live in few days) I will discuss this.

The MayCall8200 Option costs 181 (IV=0; Premium 181). Why is the premium cost for the Call Option so much more than the Put Option for the same strike price? Is that because the Option Sellers expect the Nifty to go up? I’ve been told that, more often than not, the Option Sellers (usually the experts) are on the right side. So here, the Option Sellers have a bullish view?

In the option put selling you have given formula P & L =Premium Paid-[Max(0,strike price-spot price)]. As I understand in option put selling we do not pay the premium, however, we receive the premium and pay the margin amount. So I think it should be premium received. Am I correct. Please clarify.

Forgot to say this earlier but this is an amazing effort by Zerodha. The guide is so well structured and explanations so detailed that just it makes the whole thing fun and exciting to read and understand how one should approach trading/investing.

Like the Chinese proverb “give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime” Zerodha actually does just that instead of giving Sell/Buy calls all day like just about all the brokers do.

Sir
I’m new to Stock Markets. I want to start intraday trading, what are the things that I should know before getting started.
P.S. I have read all the modules. Everything is explained so well that even a new born baby would understand markets. Thanks. ☺

sir, i have a query about margin.
on 8th may , i sold one lot of put option of nifty ( write nifty put 7700 at 20) at 20 rs. at that time my account balance was 5000 but it showed your margin exceed and it should be 13219 rs.

hello sir,
can we squarred off our writting position before expiry. let suppose if i sold 4 lot of nifty put option at 8400 strike price @ 55. so can i squarred off this position by buying 4 lot or it must be carried to expiry?????? i know writing an option is a obligation therotically but how it happens practically if we squarred off that order in a day

You can write an option at 9:15 AM for 55 and square it off at 9:16 AM for 54 and in the process pocket 1 Rupee profit. So yes, you can when you write there is no obligation for you to hold on to it till expiry. You can square it off anytime you wish.

hi karthik,
one doubt in option trading we can trade both market up trend and down trend ,in uptrend we buy call and down trend we buy put ,then why we using option selling(shorting)?
i never use shorting yet because i don’t more about it how its works after we short ,we get premium in advance right?

What could be the consequenses if i sell OTM put option & waited till the expiry? in following senarios.
e.g. presently Nifty is trading above 8500+, By lookig into margin requirements and the money i have, i decided to sell Nifty 8150 Put option @ 15.55 (yesterday mornings premium) which is either OTM or Deep OTM. this is just 5th day of August and 15/16 trading sessions are there till expiry. The premium is getting erode at very slow pace. today on 6th it is trading at 12.80 ( hence at present my position is in profit of 15.55-12.80 if decided to sq off)what if….
1) Nifty started to fall say after 4/5 session (10 more sessions for expiry) and moves over below my strike price 8150. what will be the chances of increasing premium than 15.55? or with the time decay even though Nifty closes below 8150, premium may not go past 15.55?
2) Nifty started to fall as mentioned earlier but could not move past 8150, and the premium is Rs.1.50/- on expiry day, then what will be my settlement price(0 or 1.50)?

Shreya – This is from my personal experience, avoid shorting PUT options. Panic sets in faster than greed in market. Hence market falls faster than it can raise.

Coming to your query –

1) If market falls below 8150 clearly the premium can go much higher especially where there are more days for expiry. Therefore you will end up in a loss. Also do remember if the market goes below 8150 (your strike) then the option will have an intrinsic value.

2) If Nifty stays at or above 8150 the 8150 PE will expiry worthless and you will get to keep the entire premium amount.

1.For suppose if I sell 45 put (200) , stock is trading at 43 then stock gone down to 35 … how much i can get the profit.
for selling put max credit only whould recive but how can we get maximun profit can get.

2.If I go for long put 100 ,the premium will get affected by Greeks at the end of expiry. because premium keeps on changing day to day.
If I go for spread how premium will get change? I understand the profit & loss and calculation based on strikes, for 1 point move up or down it is changing 1re up/dn.
generally premium changed based on greeks so in spreads, how premium is changing based on for 1 point move up or down and it changes 1re up/dn.

3.For protecting the short put we buy the put but in real time how buy put is compensating the short put for every 1re loss of short put?

The course has been very useful to me and am interested in option writing. But I am also aware that it is too risky to write an option apart from margin being blocked. I have used the margin calculators and found that the margin requirements are heavy. However, I have a doubt and wish you can clarify. nifty 8000pe is trading between 160 – 170 now. presuming that it nifty falls to, say 7800 in the next couple of days, the option premium should be about 360-370 or even a little higher. in effect, I would have lost about 5000 rupees per lot (October 26th expiry).
a) Will RMS require me to add 5000 immediately (Despite margin blocked being more than 5000)? If that is not the case, when i will be required to add more money?
b) Assuming spot price is strike price minus premium received, i will exit without any profit or loss on expiry day. Is that correct?

1) If there are additional funds not utilized towards other trades then RMS wont require you to add the funds immediately. Also you may want to know that you need to have minimum of SPAN margin in your account, anything lesser than SPAN the RMS will cut the position

Thank you. probably i did not properly frame the question. What i wanted to know is the requirement of adding funds on a daily basis based on m2m losses. Assuming that i just place one sell order for some put options and there is no additional money left in the account, will i need to add the m2m loss immediately. For example, selling 10 lots of a put option may require 2.50 lakhs including span and exposure margins. assuming that it goes against my expectation on first or subsequent days, should i need to add the m2m loss immediately.

RMS allows you to hold the trade as long as you have at least 1 L (SPAN) in the account. Anything less than this they will cut your position. Also, it is always good to have slightly more than SPAN+Exposure for your trades.

Hi Karthik, I have few queries listed below..
1. Suppose I buy a call option on 15th Oct @strike 1000 with premium = 100, lot size = 250 and I wait till expiry(lets say 26th Oct)..
a) The M2M will be calculated on daily basis and amount will be adjusted in my account on daily basis?
b) Suppose on the day of expiry I will exercise the contract and suppose the spot is at 1200, then my profit will be [(1200-1000)-100]*250.. Will this amount again be added to my account on expiry day? If not, what is the significance of this amount?
c) For exercising a contract, do i need to explictly do anything to exercise it or the exchange will automatically exercise it on the expiry day?
d) Profit/Loss during the series (not on expiry) = (Premium received – Premium paid) * 250… Am i right on this?…. In this case strike price and Spot price wont come into picture for calculating P&L right?

1) Since you have paid the amount in full (premium) there is no M2M applicable here. You will be cash settled on expiry
2) Yes, thats how profits are calculated and the same will be credited to your account
3) Exchange will take care
4) Yup, thats right

Today I sold 10 lots of Nifty 8300CE @ 19.5 and received a premium of Rs. 4800 aprox.
Should I wait for expiry or should I square off when I get a profit.
What happens if I do not square off even at expiry? Do I get to keep the premium or will I book a loss.

If i sold option of October 8000 put options for some premium and if i don’t buy it back before expiry what will happen since Nifty expired at 8100.
Is it just expired worth less or do i need to pay any tax, STT as seller of option

Dear Mr. Rangappa,
I have found that option writer generally makes to trade at the same time i.e. one trade of short put and another short call. Is it to minimize the loss since put and call will move in opposite direction. More over profit will be limited to premium received. Why to go for Short trade when they know that there is limited profit?

Hi, Please tell me that how may puts/call I can sell.For example if I have 200K INR in my account and I want to sell puts/call of market prize 100 RS. then how many puts/calls I would be able to sell.
Thanks I advance

Hi Karthik..
Thanks for wonderful lessons.
I have a basic doubt.. may be silly..
If i am bullish, i buy call option.. if bearish..buy put option.
Then why should one go for selling a put option if there is so much risk.. if the same can be done buying call option..

Well, this is because there could a situation where the Put option premium has swelled so much (maybe due to high volatility) that writing that would seem more appropriate compared to buying expensive call options.

I have one simple query: Assume I sell a put option at strike price 6800 of march 2016 options. Assume the premium is 30Rs and sold it at the start of the expiry. What if the Market takes a very strong bullish move and expires at 7500.
I don’t want to sell it till expiry and I want to have the whole premium of 30Rs.
Now my concerned is , since I sold 6800 put option, will I have any trouble in getting it executed on the expiry? Does liquidity play an important role or market will take care of it?
I am little confused here.

Sir if I sell bank nifty call of 15500 for March series say at premium of 300, but bank nifty moves higher and is at 15600 and there are still ten sessions left for expiry. If I think I had made wrong trade and decided to exit at 15600 how much will be deducted from premium I received of 300 per lot. Or I have to pay extra from my account. In simple term would I make some profit or loss. ( premium of 15500 pe may be at say 400)

Hi Karthik,
Is there any tool to calculate Max Pain or any formula to calculate it manually ?? And lets say we have highest number of OI in 7500 CE and 7200 Put, so is there any way to get the exact number how much Call or Put has been written off by the option writers. Thanks in Advance.

Not sure about an online tool to calculate the Max pain value, I will try to figure this and get back to you on a reliable source. The OI value itself gives you an indication of how many options are written. Remember 1 long plus 1 short = 1 Open interest.

NIFTY is currently at 7970. I expect it to rise to 8100 in the next few trading sessions.Let’s say, I want to short 10 lots of NIFTY May 7700 PE @43 today which requires me to keep around 4,00,000/- as total margin. Premium receivable comes to around 30,000/- if I execute this position.

Now, please clarify the following : –

1) After 3 trading sessions, the premium is @ 20/- . What would be my NET P/L over here if I decide to close the position?

2) After 3 trading sessions, the premium is @ 70/-. What would be my NET P/L over here if I decide to close the position? – Is it going to be 30,000 – 750*(70-43) = 9750/- or is it going to be a just a loss of 20,250/- ?

Sell Put option:
Spot price = 7970
Strike price = [email protected] (an OTM contract)
Expected price = 8100
Here the delta is assumed not more than 0.16
1. After 3 sessions if the spot price moves 130 points up, the new premium will be 20
2. After 3 sessions if the spot price moves 437 points up, the new premium will be 70
Now how the 70 will make a profit or loss ?
Please correct where m wrong and show your view.
Thank you

Sorry Karthik, I might have confused you with my question. Please look for the points and correct wherever it’s wrong .
1. In trading When we Buy first , we square it off by Selling.
2. When we Sell first, we square it off by Buying.
So in case of trading Option in premium,
3. Buy Call = Underlying (↑) and Premium (↑)
4. Buy Put = Underlying (↓) and Premium (↑)
5. Sell Call = Underlying (↓) and Premium (↓)
6. Sell Put = Underlying (↑) and Premium (↓)
Should the premium move with the underlying like above ?

Dear Mr Karthik,
I have 2 questions. Recently I shorted [email protected]. Today position at Kite shows @4.0 with P&L 3750.
1) Can I buy/ exit now? If I exit, shall I get ( premium 7750)+3750= 11500, or get the difference 7750-3750= 4000 only?
2) When I tried by clicking the ‘exit’ button , the ‘modify’ page opened, and I got confused. How to exit/ buy back?
Shall appreciate very much if you clarify this to me.

1. Rs 4000 only.
2. When you click on exit, a buy order window will open where you can either mention the limit or market order. You can also add the scrip on the marketwatch and place a normal buying order to exit.

sir I am a newbee in trading with little knowledge I trade in intraday only in nifty options I require your help to sort out in which strick prise should I trade in intraday .please help or sugguest a book to follow . hopefully help THANKS

Sir, Suppose I took a Short put position of a Strike Price 50. I received a premium of Rs. 4. Next day Market price moved up to 55 and premium goes down to Rs.3. What will be it’s impact on my P/L? If I want to square off on that day.

Each act of trading options comes with its own set of attributes. Pegging one (like buying Puts) against the other (like selling call) is not the right step towards understating options. A trader needs to be neutral and not get subjective on these things. The decision to buy a put or sell a call really depends on how the premiums are positioned. If due to high volatility the premiums are expensive…then it makes sense to sell Puts as opposed to buying expensive calls.

Question 1:
At Nifty Spot Price = 8850, I sold 2 lots of 8750PE @ 17 i.e. Premium received – Rs 2550/-
After some time Nifty goes down to 8835 and if I square off the above position @ 21 then what will be my profit?

Question 2:
At Nifty Spot Price = 8850, I sold 2 lots of 8750PE @ 17 i.e. Premium received – Rs 2550/-
On the day of expiry Nifty spot closes at 8810 with the 8750PE primium value at 20. If I am not a available to square-off and the sold option expires then what will happen? Will there be any profit? Will that be adjusted to my account automatically without me squaring-off the trade manually?

If the 8750PE primium value on expiry is 10 then what will I get/loose?

Thanks Karthik, can you please confirm that When shorting an option on the day of expiry , in any case trade will not get sold by broker before 3:30 since a trader will be waiting for the contract to expire worthless (OOM)..?

Whenever you short an option (or for that matter take up any leveraged trade), irrespective of the expiry day or not, if the position goes against you, you will be required to provide more margins, in the absence of which, the broker can close your position.

Based on this my question is, if i have margin of 47000, can you give me the exact practical scenario when my position will get squired off by broker when i am making loss …(Will it be in terms of Margin i.e. until i make a loss of 47k or in terms of premium, say 19.70 become 21 or 22..?)

Since you are short, you can hold the position as long as the margin requirement for this position is less than 46K. In case, the position goes against you, then the margins would be increased and therefore position would be lacked.

I know that an option buyer can square off his position anytime before expiry but I am a little confused whether an option seller can square-off his position before expiry ( so as to book profits when the opportunity presents) or will he have to wait till the expiry compulsorily ?

THIS IS MY FIRST QUESTION
I WRITE NIFTY CALL OPTION @9 OF 9350 ON 17-4-2017 AND RECIVED PREMIUM OF RS. 675/-
NEXT DAY MY POSITION SHOWED LOSS OF RS. 550/- AT 12.00 PM, SUPPOSE I SQAURED OFF THAT TIME
WHAT WOULD HAPPEN TO 675/- WHICH I RECIVED. WHAT WILL BE MY LOSS 550/- OR 675-550 = 125

Your loss will be 550/-. Since you are short, you will make money only if the the premium goes down from the point you have written it. You will make a loss if the premium increases. For example if you have written the option at 9, and now the premium is 12, then your loss will be 3*lot size.

What will happen if i didn’t square off my position. for eg I sold 9300 CE at 80 and nifty closed at 9200 on expiry day and my premium value becomes 0.05 paise with no buyer. will i get full 80 points in my account or need to pay heavy STT?

Sir, suppose i buy nifty 9600 call 01 Lot @ 10 than i hv to pay rs 75×10 i.e. 750. But if i want to sell the same call @10 than how much amount it should need in my account. Pls explain me the formula used at selling a option.

When you sell an option, the broker blocks margins. Formula for the margins is based on SPAN calculation and its proprietary to CBOE. However, you can use our calculator to know the margins – https://zerodha.com/margin-calculator/SPAN/

Sir, in the last 5/6 years i hv lost about 5lacs rs in nifty options. I am a medium class salaried person and just as a hobby doing trade in nifty options. But due to continuous loss stopped since 2017. Sir, i need your personal advise how can i recover this loss. .do you hv any specific article/chapter on nifty options only. Should i try my luck once more or closed it forever. Sir pls take your time and advise me thoroughly.

Sorry to hear that, Shiva. First and foremost, you should never come to the market with an expectation of ‘trying out your luck’. You should trade only when you know the dynamics of the trade very well. For example, if you are buying a Nifty Call, you should give 100% convincing reason as to why you are buying, what is the target expectation, stop loss, etc etc. If the reasons are not convincing, then you should not trade.

I can assure you with this kind of change in trading behavior, you can recover your loss.

Dear Kathik,
As an Option Writer (Put Option writer) to be precise,am i required to buy back the Puts i sold earlier before expiry?

For example,if i sold(wrote) ten lots of Nifty 9000PE at 3.00 Rupees and on the day of expiry it goes down to 0.05 or 0.10 paise,do i need to cover my position as it is ITM for me as a Put Writer or can i let it expire on it’s own?

Because the people i have been speaking to are giving contrasting answers,some say as a Put Writer if the premium goes down,my option becomes ITM from a Put writers perspective,so i should cover or else i would be given a penalty.

While some others say,since i have already paid the STT by taking a short position earlier by writing the Nifty9000PE at 3.00 rupees,i don’t have to worry about covering it back since it’s OTM(But it’s OTM from a Put buyer’s perspective,isn’t it?

So,who’s speaking the truth?If the Nifty Put that i wrote goes down from 3.00 rupees to 0.05 or 0.10 paise on the day of expiry,am i ITM or OTM? My broker said,i need to square it off because if i don’t i will be penalized by the exchange while others say,i don’t need to cover my Put Writing as it’s gonna explain worthless.Who’s right,who’s wrong?

Buying back is not really necessary. You can even hold to expiry and let it worth expire worthless. Also, if a 3 Rupee option tanks to 0.05, then it is an OTM option, not ATM. You can just let the OTM options expire worthless. You need to track the sport price to assess if the option is ITM or OTM…tracking the premiums is not really a good approach.

Som remember…if you have sold an option…dont worry about expiry…if the option is worthless i.e if its OTM, then let it expire. However, if you have bought an option and the option turns to ITM, then close it before the expiry to avoid paying excess STT.

You guys at Zerodha are god sent angels.I mean it from the bottom of my heart.I thought the quickest possible reply i would get,would be around by Monday evening but to see you guys tirelessly replying back to queries posted here fills our hearts with warmth.So i really,really wish you guys……prosper and go on to achieve big things.

So Dear Karthik,as per the reply you gave.It’s much better to track the spot price to the strike price to decide if it’s ITM,ATM or OTM.Sothe scenario i just presented.Let me try to simplify it further –

I sold(wrote) Put Options of Nifty9000PE @3.00.
[Spot Price of Nifty at the time of Put Writing was 9390]

A day later on expiry,Nifty9000PE is trading at 0.05 paise towards the close of the markets.
[Spot Price of Nifty is now at 9509,so the difference has increased even more since yesterday]

So using that as an example,the Nifty9000PE is OTM,am i right?
(Because Nifty Spot is 509 points ahead of the Nifty9000PE and it doesn’t matter
if i am a Put Writer,since the Spot is 509 points on top of the Strike Price,its a nailed on OTM)

As a Put Writer,as long as the Spot Price is way way ahead of my Strike Price then it’s an OTM,right?
And since i have already paid the STT by taking a short position to begin my trade,there is no need
for me to cover it off because i won’t be penalized by the exchange.Right?

Please,please……..do read this post of mine and reply back.I want to get it right and don’t wanna have any false notions.
I am sorry,extremely sorry for keep tormenting you but i hope you understand.I promise this thread will end here.

And apologies for getting your name wrong in the earlier post,it was a typo.
Have a great weekend and once again,it means a lot to see you guys replying back.

Vijay, thanks so much for the good wishes and kind words…and you can keep the thread as long as you get a complete satifactory answer. This forum is meant for this. We exchange thoughts and gain knowledge from each other.

Anyway, yes…if you are dealing with a PUT option, then the Option will be ITM if the spot price is below the strike price and will be OTM if the spot price is above the strike price. So in the example you’ve quoted, 9000 PE will be OTM considering the spot is 9509.

Also, if you have written an option, you need not worry about the STT bit.

Dear Karthik,
Yes,it’s crystal clear now.Thank you for showing such immense patience.I think that’s the USP of this forum along with the ease(be it the approach you take to explain something or the language that is used) with which you guys try to make us understand.The module and especially the posts are my ‘Go To’ source when it comes to gaining knowledge.I am seriously hooked on to it,i just love reading the queries and the responses given by the team at Zerodha.Learning was never this easy,i mean it.This act of yours is immeasurable and thanks for the invitation to keep the thread going but am totally satisfied now and I’m sure we’ll cross paths again.
Until then thanks a zillion. 🙂

Karthik,
I find buying PUT option is ITM is more beneficial than the OTM.
for ex : Bank Nifty is trading at 24230
buying any CE option will give the money .
but if index goes down, 24300 PE or 24000 PE would give more premium than the 24000 PE or the 24100 PE.
During downtrend, PUT Option in OTM will not get the required PREmium aswell.

you thoughts ?
— And when you find time, could you Please write some lessons on reading charts and how to use indicators to identify the direction .

This question is on Option selling.. I have sold SOUTHBANK 35CE at 0.3.. by end of the contract period, if the share quotes at around 30rs and 35CE quotes at 0.05rs (only sellers).. should I need to buy back 35CE at 0.05 (this gives 0.25rs profit per lot) and close the contract or I can just leave it without out buying so that I will get 0.30rs profit per lot? My only concern is to buy at 0.05 to close the contract..

Hi,
A have a question regarding selling of put options. viz. Suppose, on the day of expiry, I have sold OPT-CNXBAN-17-Aug-2017-24200-PE at Rs 20 (Spot price : 24292). During the day, the spot price drops to 24250, thereby increasing the premium to say Rs 35. If I square off my position, I stand to lose Rs 35 – Rs 20 = Rs 15 per lot. However, If I wait till EOD (expiry) at the spot price is still holding above 24200, what happens in that case? The premium ought to drop to 0.1 by EOD? Do I get to pocket my entire premium?

Sir, I didn’t understand why the loss of a Put Option Seller is theoretically unlimited. Spot price can be ‘0’, not beyond that. So it make me think a Put Option seller will not bear unlimited risk. His maximum losing threshold is until the Spot Price becomes 0.

True that. But imagine this – Infy right now is at 900…if you intend to write 900 PE, you will receive a premium of 10500 for a margin deposit of close to 70K. Now if Infy drops to 0 your loss will be close to 50L…that for all practical purpose is únlimited.

Sir im new to option writing…i just wanted to know if im writing a put option n holding it till expiry the premium is goin to be 5p or 10 p…then it wil b profitable only every time …or wt other factors r responsible for p&l ..pl help

Dear Karthik
My sincere thanks for excellent write-ups. However, i have an observation. You say that the put option seller might incur unlimited loss. But dont you think that the put option seller can incur a maximum loss equal to Strike Price-Premium? I mean, if the underlying price goes zero, he will have to buy a worthless asset for a price equal to Strike Price that’s all. Am i right?

If I buy Bank Nifty 25600 Put Option @ Rs. 38 but I did not sell it on the expiry. At the time of expiry if its value is @ Rs. 44 and Bank Nifty closes around 25516, then would I be in profit or loss ?

1.)Option seller pays STT while selling ?
2.)Option buyer pays if price is in the money and goes to expiry, but when option buyer square off his position it is same as option selling, so here what about STT ?